India's ESG debt market has reached a significant milestone this year, with issuance levels touching $15.6 billion, surpassing the previous record set in 2021. However, despite this achievement, India's ESG debt volume still trails behind other major Asian markets like China and Japan. In response, India's market regulator, the Securities and Exchange Board of India (SEBI), is set to broaden the scope of its sustainable finance framework, which could provide a substantial boost to ESG-labeled instruments in the region.

SEBI has announced plans to consult on the introduction of new categories within the ESG debt market, including social bonds, as well as sustainable and sustainability-linked bonds. These new products are poised to complement the existing suite of environmental, social, and governance (ESG) debt instruments. Additionally, SEBI is considering the inclusion of eligible asset-backed securities and a mandate for independent external reviews of all ESG debt, as detailed in a consultation paper released on Friday.

“The proposal is a positive move for the market,” said Xuan Sheng Ou Yong, Sustainable Fixed Income Lead for Asia Pacific at BNP Paribas Asset Management in Singapore. “It means we may have different opportunities to direct fixed income capital towards new issuers and their projects, beyond green bonds.”

The expansion of India's ESG debt market aligns with Prime Minister Narendra Modi’s broader agenda for green growth and could help counterbalance the current slowdown in Chinese issuances, which has been affecting the global market. A more robust ESG debt market in India would not only support domestic green initiatives but also position the country as a key player in the global sustainable finance landscape.

SEBI's current framework primarily focuses on products that raise proceeds for environmental sustainability initiatives, such as renewable energy and water management projects. The proposed changes would allow issuers to seek debt for a broader range of activities, thereby expanding the scope and appeal of ESG-labeled instruments in India. SEBI's consultation on these proposals will continue until September 6.

The global ESG debt market has seen a downturn, with overall issuance falling by about a third in the second quarter of this year compared to the same period in 2023, according to Sustainable Fitch. India's regulatory advancements, therefore, come at a crucial time, offering the potential to revitalize the ESG debt landscape in Asia and beyond.